What are Economic Models and why do we need them?

Economists love economic models!

An Economic Model is a simplified version of the ''real world" that can be used to explain, analyse and predict complicated economic systems. Examples of economic models that we study on our course include:

•               Demand and Supply curves

•               The Circular Flow of Income

•               The Production Possibility Curve

 

The real world is a very complicated place, and even the smartest people in the world cant predict the future! For example, most of the worlds richest and smartest people never predicted the recent Global Financial Crisis.

Economic models help up to explain, analyse and predict complicated 'real world' behaviour. Even though models didn't prevent the Global Financial Crisis, Governments did use them to plan for the world’s 

What is Economics, and why do we study it?

Economics is the social science that studies how a society uses its limited resources to satisfy its unlimited wants and needs.

Lets look at this definition a little more closely.

• ·     social science -  that is  - economics is the study of people, and how they behave.  

• ·     Limited resources – that is – every person and every country has a limited (or finite) amount of resources.

Resources are production inputs -  things used to make products. In economics we use the terms ‘resources’, ‘production inputs’ and ‘factors of production’ to mean the same thing – that is – they are all terms to describe things needed to make products.

• ·     unlimited wants and needs – that is – every person and every country has a unlimited (or infinite) wants and needs.

Another way to look at economics is by stating that ‘Economics is the study of scarcity’. 

This is simply the same idea stated in a different way. Economists state that products are scarce – that is – society cannot produce enough products to satisfy everyone. 


For example, ‘cars are scarce’ because society does not have enough resources to make cars for everyone who wants one. 


Because we have limited resources, we need Economics as a subject to help us decide 3 questions:

1. What we should produce with our limited resources
2. How should we produce the products 
3. Who will get the products we produce

Its important to study economics for many reasons – for example: it helps in

•  Understanding more about the world around us:  for example, studying economics helps us to understand why countries trade, why some people get are paid more than others. 
• Questioning the economic decisions made on our behalf by our leaders: for example  studying economics helps us to understand why Governments subsidise firms that produce certain products (e.g. public schools), but tax others such as cigarette companies  

If we didn't study economics, we would live in a very different world - perhaps resources would be 100% owned by the most powerful who would use them to meet only their own wants?. Perhaps there would be no trade, and so we would have to make everything for ourselves?  

How to win a Nobel Prize for Economics



 The 2010 Nobel Prize for Economics has been awarded to 3 economists Peter Diamond, Dale Mortensen and Christopher Pissarides for their research into markets where buyers and sellers don’t automatically find each other (or in more technical language “markets with search frictions”)

Their research has been used in lots of different markets, including the markets for used cars, for housing, and even for dating!. However, their ideas have been used most of all to help economists make sense of unemployment.


In this post you can see a short video explaining their theory

After watching the video, you can read more about their work by clicking this  economix blogsite article

What is GDP?

We are currently studying Gross Domestic Product (GDP) in class.

1) Start by watching the following video ....

2)Click on this BBC webpage that has all the remaining information you will need to answer our worksheet on GDP.

3) Find an online resource (eg post on another website, video etc) that helps explain the economic idea of GDP. Make sure that you show it to Mr Hartnett!!

4) Finally, if you have time .... does increasing GDP mean that people get happier? What do you think? Is there a better measure that economists could use?

Hong Kong's - a tale of 2 cities

Hong Kong Island has 7 million people, and very limited space to put them - two reasons why it has some of the most expensive properties in the world.

In Oct 09, a five bedroom luxury apartment sold for US$57m – a world record price that valued the space an amazing $US9,200 per sq ft.

This reading and video about Chan Hong Keung, a retired cleaner living in Monkok. Kowloon tells a different story….